Scottish food manufacturing could gain from novel logistics plan

Key points

• Labour costs
• ‘Game larders’
• Export estimates
• What is the Scottish Food Trade Association?

One word describes Scottish food and drink manufacturers’ biggest asset and their greatest challenge. Geography.

From the crystal waters of Loch Fyne, to the rugged highlands, geography supplies the industry with some of its most precious assets – top quality food and drink ingredients. But that geographical asset can melt rapidly into liability, when it comes to transporting products to distant consumers.

That’s the assessment of Malcolm Wilde, president of the Scottish Food Trade Association (SFTA). Wilde knows a thing or two about logistics. His day job is general manager for Scotland at food logistics business Nagel Langdons, part of the Nagel Group.

Here’s how he sums up Scotland’s logistics challenge. “If you’re making a food and drink product in Birmingham, nine of 10 of any supermarket’s retail distribution centres [RDCs] will be within two hours of your manufacturing site. If you’re producing that same product in Scotland, only one in 10 of those RDCs will be within two hours’ drive of your manufacturing site. So, if you are a Scottish manufacturer, the stem mileage is much greater for 90% of the RDCs you’ve got to get your products to – which obviously drives cost into your product.”

Ironically, the falling oil price has exacerbated the problem. In 2014, most third-party logistics providers (3PLs) would have levied a surcharge on distribution of between 6–7%. That has now fallen to zero. “But instead of that being a positive, it is portrayed as a negative,” says Wilde, “Retail buyers know [manufacturers’] input costs are down, so they put pressure on them to reduce their product costs.”

Labour costs (Return to top)

Another challenge is the rising cost of labour. “The labour pool is tightening in Scotland,” confirms Wilde. “In recent years, a large component of the Scottish manufacturing workforce was of east European origin, rather than from the local labour pool. At most food manufacturing sites in Scotland, the signs and instructions will be in English and Polish.

“I’m not suggesting those workers have moved away. But as the labour market has tightened, they have started finding jobs which have higher rates of pay,” he says. The result is SFTA members report having to lift wages in order to attract and retain staff. “That’s not an obstacle – it’s a fact of the marketplace. But it does drive extra cost into the product.”

The net result of this pincer movement can be increasingly uncomfortable discussions between Scottish producers and supermarket buyers. “When Scottish producers sit it in front of a buyer from a major multiple retailer, the buyer may be looking at two products – one made in Birmingham and one made in Inverness, invariably the product made in Scotland will carry more cost,” says Wilde. “So, either the Scottish product will be more expensive or there will be less margin. And that reduction in margin could make the difference for being able to invest in a new factory or not.”

But, perhaps surprisingly for a logistics specialist, Wilde does not believe the answer lies in improving Scotland’s roads. Rather, he favours a novel approach to food and drink logistics, combined with more targeted help from the Scottish government and a greater awareness from retailers of the extra costs facing Scottish manufacturers.

‘Game larders’ (Return to top)

Wilde’s remedy to overcoming Scotland’s geographic challenge is drawn from the country’s game-producing estates. “What may work [for Scottish food and drink manufacturers] is to borrow the idea of game larders, used by the big estates. Their product is the game gathered from the estates, which is taken to drop-off points – game larders – where it is consolidated before collection and delivery to a manufacturing facility.”

He believes setting up a network of collection points for finished products, akin to game larders, in rural areas of Scotland, outside the central manufacturing belt, will offer just the kick start small to medium-sized enterprises (SMEs) need to boost their sales.

So, is this a role for 3PLs? Wilde argues not. “You could say: why doesn’t a logistics service provider build these sheds throughout Scotland? But the numbers wouldn’t stack up. It would have to be supported by the government at least in the early stages in order to make sense of working with small volumes.”

However, over time, as five cases became 50 cases, and then five pallets became 50 pallets, Wilde believes the network could become self-sustaining.

At least, there’s no shortage of demand for Scottish food and drink products. In fact, the biggest brake on sales – aside from the logistics challenge – is lack of supply. Food manufacturers’ expansion, particularly for SMEs, can be frustrated by lack of succession planning. Many businesses are in second or third generation management and lack candidates to take over the business.

“Scottish food manufacturers are successful and don’t have a problem with demand. Often times their problem is supply – whether it’s supplying peak volume requirements, because they make a seasonable product, or the challenge of forming a long-term plan in terms of capital investment or succession.”

Despite the challenges, Wilde is optimistic about the prospects for growth, based on Scotland’s natural assets and the entrepreneurship of manufacturers. “Food manufacturing is one of the most exciting sectors in which to be involved in Scotland,” says Wilde. “I see a lot of intelligent people with a passion for new product development involved in food and drink in Scotland.”

One of the sector’s biggest strengths – due to the sector’s scale – is the speed with which firms can bring a new product to market. “I have customers who have product signed off weeks before it comes to production and that’s a great strength. Retailers will come to Scottish manufacturers if they want a good quality product that can be put on their shelves quickly.”

But which shelves are more important to Scottish manufacturers those on the mainland or in overseas markets? While praising the work of the Scottish government in promoting Scotland’s products abroad, Wilde is clear the greatest opportunity for Scottish food lies south of the border. “We can’t ignore the importance of the rest of the UK as a significant and accessible market for Scottish food manufacturers.”

Export estimates (Return to top)

Estimates from the latest Global Connections Survey reveal total Scottish food and drink manufacturing exports, including whisky, soared by £3.9bn, or 73%, between 2002 and 2013, from a value of £5.4bn to £9.3bn. Over the same period, food and drink exports from Scotland to the rest of the UK rose by £1.7bn, or 64% from a value of £2.6bn to £4.3bn in 2013. Drink exports, mainly whisky, accounted for 86% of total overseas food and drink manufacturing exports in 2013 – highlighting the critical importance of UK markets for Scottish food products.

Talking of overseas exports, Wilde says his members report no strong feelings, either in favour of the UK leaving the EU or staying. Those views could be put to the test in an in-out referendum as early as this summer. Then, there’s the thorny question of whether the UK’s exit from the EU would trigger another independence referendum? If a second Scottish referendum took place soon, many believe the nationalists would win convincingly.

Whatever the changes to the political and economic landscape, Wilde remains cautiously optimistic that food and drink manufacturers will continue to manage the challenge of Scotland’s geography. “You can’t argue against nature or geography. But we can do more to mitigate its effects [on distribution and production costs] by adopting the game larder approach to food and drink product collection.”